Brazil's President Is Running Scared

Raul Gallegos is a Bloomberg View contributor, who covers Latin American politics, business and finance. He was a columnist for Reuters and a correspondent for Dow Jones and the Wall Street Journal. He is a graduate of the University of California at Berkeley and Columbia University. He grew up in El Salvador and is based in Colombia.
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Brazil's President Dilma Rousseff, who is running for re-election in October, is starting to look desperate. Her approval ratings show why: at 37 percent they're near the lowest since she was elected in 2010. Rousseff's electoral bread-and-circus tactics suggest the brand of paternalistic politics Brazil can expect if she wins again.

Let's start with the circus. Rousseff's administration recently postponed a planned tax increase on beer and soft drinks until after hosting the World Cup next month. The president knows that the success of the global soccer tournament will affect her chances at the ballot box. Brazilians are already furious about overspending on unfinished stadiums that many feel came at the expense of social programs and public services.

Then there's the bread. Last month, the president raised cash transfers to the poor by 10 percent (well above Brazil's 6 percent inflation rate), under the popular Bolsa Familia welfare program. She also cut personal income taxes. Higher cash handouts irked opponents so much the government was forced to publicly defend their legitimacy.

Rousseff's latest tack is to try scaring voters. The president's Worker's Party launched a radio and television campaign with the slogan: "Brazil does not want to turn back"-- the idea being that her opponents would somehow reverse Brazil's progress.

But Rousseff has already done plenty to set back Brazil. For starters, state meddling in the economy and misguided incentives have inflicted so much harm that Brazil's labor productivity sits at levels little changed since the 1970s. Investment in Brazil fell to 18 percent of gross domestic product last year, below the 20 percent level the country posted in 2010, the year before Rousseff took office, according to Moody's.

In another sign of economic retreat, Moody's estimates that generous state spending and slowing economic growth will push Brazil's debt levels to 59 percent of GDP this year, second only to the 60.9 percent Brazil posted back in 2009 amid the global financial crisis. Brazil's weak economic performance is one reason Moody's cut the country's credit score in March.

Public services are so poor that Brazil's frustrated middle class turned its back on Rousseff last year, with a series of massive street protests. Her administration is also responsible for the energy subsidies that have turned national oil company Petrobras into an over-indebted, money-losing behemoth. Petrobras shares have declined 34 percent since Rousseff took office.

Sadly, Rousseff seems to want more state intervention. The president's campaign manager, Rui Falcao, has called for less independence for the central bank and for capital controls during a second Rousseff term.

No doubt Brazil's Bolsa Familia -- which gives poor families cash in exchange for vaccinating children and sending them to school -- has promoted more educated, healthier Brazilians. Rousseff's administration also did much to promote more bank lending that enabled millions of Brazilians to consume more. But that was the easy part.

Brazil needs more than cheap beer and energy subsidies. A tax take -- at 36 percent of GDP, higher than that of its peers -- is squeezing companies and consumers. Red tape and rigid labor laws make Brazil one of the world's most costly countries for running a business.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

Raul Gallegos is a Bloomberg View contributor, who covers Latin American politics, business and finance. He was a columnist for Reuters and a correspondent for Dow Jones and the Wall Street Journal. He is a graduate of the University of California at Berkeley and Columbia University. He grew up in El Salvador and is based in Colombia.
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